Is Ircon International (NSE:IRCON) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Ircon International Limited (NSE:IRCON) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ircon International

How Much Debt Does Ircon International Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Ircon International had debt of ₹25.7b, up from ₹15.0b in one year. But on the other hand it also has ₹55.5b in cash, leading to a ₹29.8b net cash position.

How Strong Is Ircon International's Balance Sheet?

According to the last reported balance sheet, Ircon International had liabilities of ₹71.2b due within 12 months, and liabilities of ₹44.2b due beyond 12 months. Offsetting this, it had ₹55.5b in cash and ₹8.77b in receivables that were due within 12 months. So its liabilities total ₹51.1b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ircon International has a market capitalization of ₹253.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Ircon International boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Ircon International grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ircon International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ircon International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Ircon International created free cash flow amounting to 9.2% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Ircon International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹29.8b. And it impressed us with its EBIT growth of 38% over the last year. So we don't have any problem with Ircon International's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Ircon International (of which 1 is potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com